Recently a number of water utilities have either been granted or applied for drought orders under the Water Resources Act 1991. A drought order allows water utilities to ban "non-essential uses" of water in a specified area whilst the drought order is in force. Drought orders raise a number of issues for the PFI industry including whether:

  • a drought order is a change in law in a PFI project entered into using required drafting contained in HM Treasury's Standardisation of PFI Contracts (SOPC)
  • what project companies could do to address any service or performance issues created by a drought order, again in the context of the required drafting contained in SOPC.

SOPC required drafting in relation to change in law includes wording stating that any legislation that comes into force after the date of the relevant PFI contract which has not been published prior to the date of the PFI contract is a "Change in Law". The definition of legislation includes orders made under or to be made under any act of parliament and therefore includes drought orders, which are an order made by the Secretary of State for the Environment under the Water Resources Act 1991.

If the terms of a specific drought order relate only to a particular PFI project or only to services similar to those being provided under the PFI contract, the Change in Law may fall to be treated as a Discriminatory or Specific Change in Law in accordance with SOPC. In these circumstances further compensation or relief may be available to the PFI contractor. It will therefore pay to review the specific language of a drought order in the light of the particular services being provided under a PFI contract. The remainder of this note assumes that the terms of any drought order will be general in their nature and therefore fall to be treated as a "general change in law" for the purposes of SOPC.

A drought order restricting the use of hosepipes or sprinklers or banning the cleaning of the exterior of buildings (other than windows) may have performance implications in PFI projects where, for example, performance indicators relate to the standard of sports pitches or the external appearance of buildings. Any restriction on the use of water could potentially lead to an inability to perform certain obligations under a PFI contract and to financial deductions under the payment mechanism.

The required drafting in relation to variations contained in SOPC states specifically that an Authority cannot reject a change in service which is required in order to conform to a change in law. Any service failures that may arise as a result of the imposition of a drought order could be addressed by project companies issuing a change notice under the PFI contract. The change order would propose variations to the relevant performance indicators or services to take account of any inability to perform the services created by a drought order. The amendment of the relevant performance indicators or service requirements would ensure that there are no breaches by the project company of any previous standards.

It should be noted that SOPC required drafting allows the Authority to examine the effects any reductions in the performance standards would have on the unitary charge payable to the project company and to require a corresponding reduction in the unitary charge.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 06/07/2006.